Net Operating Income (NOI)

NOI is a property's total income minus operating expenses, before accounting for debt service, income taxes, depreciation, or capital expenditures. It is the foundational cash-flow figure lenders and appraisers use to calculate DSCR, cap rate, and debt yield, making it the single most scrutinized number in a commercial loan or purchase underwriting package.

Formula: NOI = Gross Rental Income − Vacancy/Credit Loss − Operating Expenses

NOI deliberately excludes financing costs and non-cash items so that it reflects the property's operating performance independent of how it's financed or owned — the same building has the same NOI whether it carries a $2M loan or no loan at all, whereas cash flow after debt service would differ. This is what makes NOI comparable across deals and usable in the cap rate and DSCR formulas.

Operating expenses subtracted to reach NOI typically include property taxes, insurance, utilities, repairs and maintenance, property management fees, and reserves for replacement — but explicitly exclude mortgage principal and interest, income tax, depreciation, and major capital improvements (which are treated as capital expenditures, not operating expenses).

Because NOI drives loan sizing directly, underwriters scrutinize both sides of the calculation closely: on the income side, they'll often apply a market-rent or trailing-12-month adjustment rather than trusting a seller's pro forma; on the expense side, they'll add back any owner-specific costs and layer in a management fee even for owner-managed properties, since a new buyer would need to pay for that function.

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